Loyalty Insights
The economics of loyalty
By Rob Markey and Fred Reichheld
Fred Reichheld and Rob Markey are authors of the bestseller The Ultimate
Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World.
Markey is a partner and director in Bain & Company’s New York office and leads
the firm’s Global Customer Strategy and Marketing practice. Reichheld is a
Fellow at Bain & Company. He is the bestselling author of three other books on
loyalty published by Harvard Business Review Press, including The Loyalty Effect,
Loyalty Rules! and The Ultimate Question, as well as numerous articles published
in Harvard Business Review.
Copyright © 2012 Bain & Company, Inc. All rights reserved.
Content: Global Editorial
Layout: Global Design
The economics of loyalty
If you are a commercial banker, you know intuitively that some of your customers are worth far more to your business than others. The best customers maintain higher deposit and loan balances, use more banking services and
stay with you for a long time. They are loyal, enthusiastic advocates of your bank, singing your praises to friends
and colleagues. They are promoters.
Say you run a chain of hotels. You know that your best customers are the guests who visit your properties time after
time, spend a lot of money because they value the amenities and services your hotels offer and recommend your
hotels to other travelers. They treat your hotel staff well. Those customers, too, are promoters.
Here’s the challenge: Do you know how much more valuable these customers are than others? Do you know what
it might be worth to turn another 10% or 20% of your customers into promoters? Unless you can answer such
questions, you are flying blind. You can’t know how much to invest in the efforts and initiatives that will create and
retain more of these valuable customers.
The Net Promoter® system provides a method of answering these questions so you can invest with confidence that
your efforts will yield profitable growth. It works in banking, hospitality, industrial services or almost any other industry.
Net Promoter companies regularly survey their customers, asking them the “ultimate question,” which is typically:
On a zero-to-10 scale, how likely is it that you would recommend this company to a friend or colleague? Companies
then sort their customers into promoters (9s and 10s), passives (7s and 8s), and detractors (everybody else). They
then confirm what other companies have consistently found: Each category of customers exhibits significantly different
patterns of behavior, with corresponding effects on profitability that can be quantified with some precision.
With careful analysis, companies can not only estimate the relative profitability of promoters, passives and detractors, they can also estimate the impact of proposed actions and initiatives on company performance, providing
guidance to investments in improving customer performance.
The lifetime value of different groups
shorter and less profitable relationships with a
company. Use the retention rate of each group to
calculate the average lifetime of promoters, passives and detractors.
The first step is to calculate the lifetime value of an average customer. (If you’re not sure how to do this, you
can get a brief refresher course at www.netpromotersystem.com/lifetimevalue.) The fundamental idea is to tally
up all the cash flows attributable to the life of a typical
customer relationship and put them in today’s dollars.
Next, using the lifetime value of an average customer as
a baseline, you can tally up the differences in lifetime
value for promoters, passives and detractors based on
the ways their respective behaviors produce differences
in revenue and cost. The following list describes several
characteristics that distinguish the categories:
•
•
Retention rate. Detractors generally defect at higher
rates than promoters, which means that they have
1
Pricing. Promoters are often less price sensitive
than other customers. They were attracted in the
first place by the value they saw in your products
and services. They rarely need a huge promotion to
trigger their purchases. The opposite is generally
true for detractors. To estimate differences in price
realization, you’ll need to examine the market basket
of goods or services purchased by promoters and
detractors over a six- to twelve-month period so you
can calculate the margin on each basket, keeping
track of discounts and price concessions. (Note:
Some companies have chosen to offer their best
The economics of loyalty
deals to their most loyal customers, which can
change price realization and skew the results of
this sort of analysis.)
•
Annual spending. Promoters increase their purchases faster than detractors. Your share of their
category spending increases as promoters choose
your products over competitors, upgrade to higherpriced products or services and respond with
enthusiasm to new offerings.
•
Cost efficiencies. Promoters typically cost less to
serve. They complain less often and they are responsible for fewer credit losses. They bring you more
new customers, reducing your sales, marketing,
advertising and other customer acquisition costs.
Because promoters have longer customer lifetimes,
their acquisition and startup costs can be spread over
more years of lifetime revenue. And their higher
propensity to upgrade to premium products and services often increases the margins on their business.
•
one-third those for detractors. Promoters make nearly
seven times as many positive referrals as detractors.
To estimate the financial impact of these behaviors, team
members used industry-average net interest margins
on deposits and loans and industry-average overhead
and other costs to create an average retail bank profitand-loss (P&L) statement. They then converted this to
an average customer-level P&L by simple division. Next,
they plugged promoter, passive and detractor behavior
into a simple model to estimate the financial impact of
their different behaviors, converting them to lifetime
value by discounting the future cash flows. Based on
that analysis, a promoter is worth roughly $9,500 more
to a bank than a detractor (see Figure 1). In fact, detractors have a negative lifetime value: They actually
destroy value for shareholders and employees.
The analysis still leaves some elements of value unaccounted for. For example, our work shows that the new
customers referred by promoters are significantly more
likely to become promoters themselves, and are therefore more valuable than the average new customer. Similarly, our work with Bain clients shows that detractors
cost significantly more to serve than promoters. They
put more demands on call centers, raise more problems
that need to be resolved and are less likely to use selfservice tools, such as online banking. When we work
with our clients, we typically estimate and allocate these
additional cost differences, further improving the precision of the estimated value differences.
Word of mouth. The financial impact of positive
or negative word of mouth is usually significantly
greater than leaders realize. Although it isn’t easy
to do, you can estimate the effect of positive and
negative word of mouth. Begin by quantifying (by
survey if necessary) the proportion of new customers
who selected your firm because of reputation or
referral. The lifetime value of these new customers,
including any savings in sales or marketing expense,
should be allocated to promoters. (More than 80%
of positive referrals come from promoters.) Detractors, meanwhile, are responsible for more than
80% of negative word of mouth, and the cost of
this drag on growth should be allocated to them.
The link between loyalty and growth
This micro view of customer economics provides a foundation for cost-benefit analyses of investment decisions
aimed at building stronger customer relationships.
Leaders need a macro view as well, however. They must
be able to determine how valuable it would be to improve
overall customer loyalty as measured by Net Promoter
scores. That enables them to set goals for improvement
and to hold executives accountable for achieving that
improvement.
A team of Bain researchers studying affluent banking
customers found significant differences in all such
profit-driving behaviors among promoters, passives and
detractors. Promoters give their primary bank almost
45% more of their household deposit balances than
detractors do. They buy, on average, 25% more products
from the bank than detractors, and their mix of products
skews toward more profitable checking and savings
accounts. Attrition rates among promoters average only
In this case, the appropriate method is to determine
your overall Net Promoter score (NPS ®) relative to
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The economics of loyalty
Figure 1: Among affluent customers, promoters are worth $9,500 more than detractors
Affluent customer retail banking lifetime profitability
$8K
6.7
Word of mouth
5
Retention
3
Additional upside
(not quantified)
2.0
Share of wallet
2.0
Base
• Value of secondary referrals
from referred customers
• Decreased cost to
serve promoters
0
• Investment product crosssell
rates to promoters
3
5
4.8
Detractor
Passive
Promoter
Source: Bain NA Financial Services NPS Survey 2008
branches. Moreover, the strength of the retail operations
of Bank of America or Wells Fargo might differ significantly from one region to another, since these banks to
a significant extent are composed of acquisitions made
in recent years. The team controlled the effect of mergers
and acquisitions by removing the gain resulting from
them from the bank’s overall growth. Finally, because
bank revenue is so dependent on interest rates, and
because interest rates fluctuate so dramatically, the
team used retail deposit balances (which are publicly
reported) as an indicator of organic growth.
competitors. The most rigorous approach requires what
market researchers call a double-blind research design,
where the customers remain anonymous and the researchers don’t reveal who is sponsoring the survey. This
minimizes bias both in the sample itself and in the way
customers respond to the survey. After you have calculated each competitor’s score, you can determine your
company’s relative NPS by subtracting your best competitor’s score from your own. Then you can compare
relative NPS with growth rates.
The Bain team that examined North American banking
customers also studied the relationship between the
same banks’ NPS and organic growth. It found that
differences in relative Net Promoter scores within a
region explained most of the differences in relative
growth rates of retail deposits. It’s essential in any such
study, of course, to define the relevant competitive set
carefully. For example, Bank of America competes
against TD Bank in the northeastern US but not in the
western part of the country, where TD Bank has no
The results of the analysis can be seen in figure 2,
which plots relative NPS versus growth among banks
in the Midwest region of the US. The bank example,
of course, is only one industry. But as we have worked
with Bain clients, members of the NPS Loyalty Forum
and others over the past several years, we have learned
that the relationship between NPS and organic growth
within a closely defined competitive set is quite strong
for most businesses.
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The economics of loyalty
Figure 2: NPS correlates with organic deposit growth in the midwestern region of the US
Midwest region organic deposit growth (2001–2007)
R² = 0.63
6.0%
JP Morgan Chase
Key Bank
National City
4.0
Fifth Third
Bank of
America
Wells
Fargo
2.0
Comerica
0.0
US Bank
2.0
0.5
0.0
0.5
1.0
1.5
Midwest region relative NPS (2008)
Sources: Bain Financial Services NPS Survey 2008, SNL database
A number of large corporations around the world have
performed similar analyses for their own businesses,
correlating Net Promoter scores with relative growth.
The electronics and consumer products company Philips
compared its scores against those of competitors for
each carefully defined business and region—shavers
in China, for instance. Philips found that the median
growth rate of businesses in NPS leadership positions
was eight percentage points above the rate of competitors
in that market. Where Philips trailed all its direct competitors, growth was slower than the competition by
five percentage points. Philips executives, knowing
from this kind of analysis what loyalty improvements
are worth, have set a goal to have 50 percent of the company’s businesses in NPS leadership positions by 2015.
Relative Net Promoter scores do not explain relative
growth in every industry or situation, because factors
other than customer loyalty can play an important role.
But scores are a powerful predictor of growth in most
situations, and will help you quantify the value of investing in greater customer loyalty. The payoff, typically, is
far greater than current accounting might otherwise
suggest. That’s why many companies still systematically
underfund investments that could produce superior
loyalty. For those that take the time to run these numbers, however, the results are very real: better, targeted
investments in loyal customers: the best engine of
sustainable, profitable growth.
Net Promoter® and NPS® are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
4
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